Commercial insurance lines pricing increased in the fourth quarter of 2014, but only by 2%, according to the most recent Commercial Lines Insurance Pricing Survey (CLIPS) released by professional services firm Towers Watson.
These numbers continue the trend of price increase moderation that has been steadily occurring since the first quarter of 2013.
This phenomenon can also be seen in loss ratios, which improved by almost 5% between 2012 and 2013, but then improved by only 3% in 2014.
“The trend of moderation in price increases over the last 12 to 18 months is most significant for workers compensation, for which increased in late 2012 at almost 10%, and is consistent with the lingering benign loss environment,” Alejandra Nolibos, a director with Towers Watson’s Property & Casualty Insurance, said in a statement.
“The industry continues to report favorable loss ratio trends, and the perception is that prices are adequate. For long-tailed lines, though, much of the final underwriting result of the business being put in the books today will hinge on the long-term behavior of inflation,” she continued.
These numbers, when put into perspective, may indicate that the commercial lines sector is headed back towards a soft market.
“Historically, the move to softer rates is in line with prior market cycles,” MarketScout CEO Richard Kerr said in a statement. “After 37 months, the rate increases appear to be over. The next soft market will start as soon as a composite rate decrease is measured.”
Kerr predicts that the shift to a soft market will occur in a relatively short timeframe.
He forecasts that it is “coming—and soon. We expect the beginning of the next soft market cycle to be in early 2015,” Kerr says. “We don’t expect the aggressive pricing which occurred in the last soft market cycle of 2006- 2011, nor do we expect another 70-month cycle.”
Nolibos is not quite as certain, but agrees with Kerr that smart agencies should be prepared for any change in market outlook.
“Carriers will always need to make an acceptable return on their risk portfolio. When the investment return is not adequate, improvements may still be needed to the underwriting side of the income equation. However, not all carriers have the same profit hurdle or timing requirements in their business plans, creating more dynamics in the pricing trends,” she said.
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